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What the coming $68 trillion Great Wealth Transfer means for financial advisors

Key Points
  • For financial advisors, the transfer of wealth from baby boomers to heirs over the next two decades is a bit like climate change: The consequences may eventually be huge, but it's easy to ignore the issue in the short-term.
  • Cerulli Associates estimates that as much as $68 trillion will move between generations within 25 years.
  • Most studies suggest that 80% or more of heirs will look for a new financial advisor after inheriting their parents' wealth.
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For financial advisors, the transfer of wealth from baby boomers to their children over the next two decades is a bit like climate change: The consequences may eventually be huge, but it's easy to ignore the issue in the short-term.

The youngest boomers are now 55 years old and the oldest are 73. In 2016, there were roughly 74 million boomers, according to the U.S. Census Bureau, and more of them are now dying than being replaced by boomer-aged immigrants. With an estimated $30 trillion to $40 trillion in assets, they are the lifeblood of the financial advice industry and, over the next two decades, they are expected to pass much of their wealth on to their Gen X and millennial children.

The vast majority of those heirs will fire their parents' financial advisors.

"It's going to be a fluid environment with assets up for grabs in the next 20 years," said Gauthier Vincent, lead wealth management partner at Deloitte Consulting. "It's a big risk for many advisory firms and a big opportunity for others."

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This Great Wealth Transfer is about to kick into a higher gear. As much as $68 trillion will change hands between various generations over the next 25 years, according to Cerulli Associates. This presents enormous challenges for advisors in every sector of the industry. It pits the profitability of practices today against their viability in the future.

Millennial clients currently have much less wealth than their parents and are a money-losing proposition for most financial advisors. They also have very different expectations of financial advisors in how they want services delivered to them.

"There's a chasm between generations in how they want to deal with wealth managers," said Vincent. "If firms are slow to embrace the digital transformation of the business, more people will change advisors."

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Most studies suggest that 80% or more of heirs will look for a new financial advisor after inheriting their parents' wealth. While that may be an existential threat to many advisors down the road, it doesn't change the fact that engaging those younger clients is still a money-losing proposition for most financial advisors.

"I expect we'll see a tipping point in the industry in about five years," said Peter Mallouk, head of RIA Creative Planning, which serves high-net-worth clients. "The industry is unprepared for this wealth transfer."

The lack of preparation is understandable. In the late stages of the longest-running bull market in history, there's no shortage of profitable high-net-worth clients for the industry to serve. And the high costs of compliance, technology and personnel needed to effectively address the millennial market involves a lot of short-term pain.

"If a financial advisor has 400 clients and wants to engage with their clients' kids, that amounts to roughly three times the work and three times the cost," said Mallouk. "It only makes sense for advisors to do that work if they're going to be around for decades and can invest heavily in that space."

If firms are slow to embrace the digital transformation of the business, more people will change advisors.
Gauthier Vincent
lead wealth management partner at Deloitte Consulting

Mallouk's firm has a leg up on most advisors in this regard. Creative Planning is regularly involved with setting up trusts and financial plans involving multiple generations for their ultra-high-net-worth clients. "We do a lot of legal work involving multi-generational estate planning, so that gets us involved with kids," he said. "Not a lot of advisors do that kind of work."

It still doesn't guarantee that the kids of Creative Planning's clients will stay with the firm after their parents die. Family psychology appears to dictate that kids feel no loyalty to Mom and Dad's financial advisor.

Ric Edelman, founder of Edelman Financial Engines, one of the largest RIAs in the country, says psychology has nothing to do with the issue. "If it's true that the vast majority of children will find new advisors, it's a message to the financial services community that they are failing to deliver the services to retain that business," said Edelman.

"Seventy-five percent of advisors don't do financial planning," he added. "Kids see the services their parents are getting, and it's not what they want."

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$68 trillion is about to change hands in the U.S.

Edelman, unlike most of the traditional advisory industry, has an open door to virtually anyone looking for advice and financial planning. Ten years ago, he lowered the firm's investment minimum to $5,000 and last year, he merged with robo-advisor firm Financial Engines, which provides an online advice platform for roughly 700 employer 401(k) plans serving about 10 million people.

"We don't refuse people because of their net worth," said Edelman. "A person with $5,000 in a 401(k) plan who reaches out to a financial advisor is going to increase their wealth; they're going to inherit assets or win the lottery or refer other clients to you.

"You don't know who they'll become."

Therein lies the opportunity and the risk for advisors.

I predict that half of financial advisors will be gone in the next 10 to 15 years.
Ric Edelman
founder of Edelman Financial Engines

Chuck Failla is determined that his small New York-based RIA, Sovereign Financial Group, will survive the coming wealth transfer. "It's inevitable that 100% of our book of business will turn over," said Failla, whose firm currently has four producing advisors managing $197 million in assets. He plans to add another six to eight advisors over the next three years. "We've been focused on this for a few years and we've taken steps to make sure the firm is in good stead in 20 to 30 years."

Failla is particularly mindful of its fees. The firm charges 1% on the first $1 million in assets and 0.5% thereafter. In the past year, he has enabled kids-of-clients to pool their assets with their parents to get discount pricing while still getting individual financial planning.

That puts the cost only slightly higher than the average robo-advisor churning out investment portfolios for people based on online questionnaires. "Any advisor looking to be in full swing business in five to 10 years better have a service model capable of running on lower fees," said Failla. "We want to be profitable down to 50 basis points."

His other big objective is to develop the digital experience for clients. He says that younger investors as a group want more interaction with their advisors than their parents do and they want to connect, share content and conduct business online.

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Like other advisors with relatively small practices, Failla has made use of the products and platforms of custodians and fintech companies to offer increasingly sophisticated digital interactions with clients. "No one is fully digital with us now, but we're moving in that direction," said Faila.

Richard Parry, president and CIO of Tom Johnson Investment Management in Oklahoma City, takes a sanguine approach to the coming generational transfer of wealth. "Wealth transfer is always ongoing and it represents an opportunity," said Parry, whose firm is ranked No. 9 on the CNBC FA 100 list of top-rated wealth mangers. Like most advisors, the bulk of his clients are over 50 years old, but his firm is building out its technology capabilities to provide services the way NextGen investors want.

"We have to work hard to retain and generate new business," he said. "We think the best approach is honesty and education."